When home buyers and owners fix up their houses, the federal government
normally doesn’t provide them with any special tax breaks or mortgage money
discounts. But under a pair of bipartisan bills pending in the House and Senate, anestimated 1 million owners and buyers across the country could qualify for an
attractive new form of renovation tax credit worth up to $40,000 per house.
Alternatively, they could use their credit to cut their mortgage interest rate far
below prevailing market levels.

Since the bills are co-sponsored by nearly half the House–205 members so far–and 38 members of the Senate, they could pass
this year, provided the Republican leadership and President Clinton cooperate.

Here’s how the new tax credit would work: As part of a forthcoming urban rejuvenation effort planned by the White House and
congressional leaders, tax-credit proponents want to focus attention on hundreds of thousands of homes in big-city and small-
town neighborhoods that need rehabilitation.

The neighborhoods tend to be among the oldest and most architecturally distinctive in their areas. All have been designated by
state or federal agencies as having historic importance to the community as a whole.

The neighborhoods are not necessarily hot real estate prospects at the moment, but they could be if the houses are restored by
their owners or by new buyers who move in and remain in the neighborhood.

Under the pending tax credit bills (H.R. 1172 and S. 664), buyers or owners of homes in state or federally designated historic
neighborhoods could recoup up to 20 percent of their renovation expenses in the form of tax credits. A fix-up that cost $50,000
would generate a $10,000 credit; a $100,000 project would generate $20,000.

Tax credits come right off the bottom line of your federal income tax. Unlike deductions, which are most valuable for people in
the highest tax brackets, credits work for people at all income levels. They cut what you owe the government dollar for dollar.
If you can’t use the entire credit in one tax year, it can be rolled over.

Under the pending bills, buyers and renovators of homes could also convert their credits into cut-rate mortgage money. They
would receive federal “mortgage credit certificates” that they could provide to their lender to buy down their interest rate to
below-market levels. The size of the rate reduction would depend on the size of the credit, the size of the loan and how deep a
cut buyers want.

Builders, developers and contractors could participate in the program as well. They could buy and renovate homes, then sell
them at a profit to new buyers–with the federal tax credit attached. Builders could not use the tax subsidies for themselves,
however; only resident owners would qualify.

All buyers would be expected to live in their newly renovated homes for at least five years. If they moved out and sold early,
they would face recapture of a prorated share of the tax credit they had pocketed. For example, if you received a $20,000
credit and moved out after 30 months, half the required 60 months, you’d owe the IRS $10,000.

The renovations assisted by the tax credits would have to be consistent with guidelines maintained for historic districts by state
or federal agencies. That means you couldn’t expect a $20,000 tax credit if you bought a home in a neighborhood of Victorian-
era properties and spent $100,000 turning it into a starkly modern-looking house that stuck out like a sore thumb.

Sponsors of the bills and the National Trust for Historic Preservation estimate that about 1 million houses, condos,
cooperatives and mixed-use dwellings around the country would be eligible for the new credit initially, and that the program
would cost the Treasury about $1.2 billion over 10 years. But supporters argue that the economic ripple effects of revitalizing
older, urban neighborhoods stimulated by the credits would more than make up for the loss of revenue.

Richard Moe, president of the National Trust for Historic Preservation, sees the bills as a way to bring capital and life to realty
markets that haven’t blossomed for decades. But can the legislation pass this session?

Moe said he’s optimistic, “because the president and Congress both are interested in urban revitalization” this spring. House
Republicans are working with the administration to craft an package to combat urban sprawl–and could include the tax credit in
it. With so many sponsors in the House and Senate, they’ll be hard-pressed to ignore it in an election year.